When the SEC filed a federal lawsuit Monday against cryptocurrency influencer Ian Ballina for failing to register a cryptocurrency as a security before launching its 2018 initial coin offering (ICO), everything ran for the first time. Appeared off-the-mill: The SEC has, over the years, filed civil lawsuits against individuals and organizations for commissioning unregistered ICOs.
Eagle-eyed observers then read a little more in the fine print.
In a bold and potentially unprecedented move buried in the lawsuit’s 69th paragraph, the SEC today claimed that it has the right to sue Ballina not only because her case pertains to transactions conducted in the United States, but also because, Essentially, the entire Ethereum network falls under the purview of the US government.
In its complaint, the regulator noted that ETH sent to Bali was “validated by a network of nodes on the Ethereum blockchain, which is more condensed in the United States than in any other country.” The SEC then concludes: “As a result, those transactions took place in the United States.”
The SEC appears to be suggesting this, as currently more valid nodes of Ethereum operate in the United States than in any other country, All Ethereum transactions globally must be considered of US origin. Currently, 45.85% of all Ethereum nodes operate from the United States, according to Etherscan. Germany has the second largest density of nodes by comparison with only 19%.
“Saying That Enables [the SEC] Characterization of trading on the Ethereum blockchain as doing trading on the US securities exchange,” explained Brian Fair, a law professor at the University of Kentucky. decrypt, “Which is convenient from their regulatory standpoint. It makes things so much easier.”
If the SEC were to successfully classify activity on Ethereum similar to the US securities exchange, it would be up to the regulatory body that explicitly claims jurisdiction over all activity on the decentralized Ethereum network. Such a development would be a major increase in the role of the SEC in overseeing both Ethereum in particular—where the vast majority of NFT and DeFi activity occurs—and crypto as a whole.
Fair noted that the language of today’s complaint has no legal significance, and because of the nature of the SEC’s lawsuit against Ballina, the court in this case is unlikely to address this specific issue. But this does not mean that the statement has no significance.
“I think they are trying to get their vision of what Ethereum is in the jurisprudence ecosystem, and how it works,” Fair said. decrypt, “It’s the SEC saying, ‘This whole body of financial activity is within the scope of the stuff that we regulate, and so we’re going to regulate it all.
Fair considers such a full claim of jurisdiction over the entire Ethereum ecosystem as unprecedented.
“This is the first time I have seen the SEC really understand how it understands the Ethereum ecosystem to work, and why it thinks it falls within the scope of what is regulated by the SEC,” he said.
Last week, in the hours following Ethereum’s successful merger into a proof-of-stake consensus mechanism, SEC Chairman Gary Gensler implied that the transition could bring the network closer to the definition of security in the eyes of the government.
After testifying before the Senate Banking Committee, Gensler gave his view on how “stakes” (i.e. pledging assets to a crypto network in exchange for passive rewards) could be interpreted as an indication that an asset should be so-called. Qualifies as a security under. Test, although he did not address any specific cryptocurrency or network by name.
Fair thinks that today’s closeness to that statement is no accident.
,[Today’s language] What Gensler was finding in his statement seems completely consistent. […] That the SEC sees all of these as securities and is therefore going to make regulatory decisions regarding the entire ecosystem,” Fair said.
2/2
Instead of taking a simple case, the SEC is using it to set a precedent, claiming that ALL OF CRYPTO is within the SEC’s jurisdiction.
This is an absolutely unacceptable overstep that will have to be aggressively pushed back.
— adam cochran (adamscochran.eth) (@adamscochran) September 19, 2022
Under Gensler, the SEC has yet to take an official stance on Ethereum, despite the Commission’s leadership under the previous administration suggesting that Ethereum was “decentralized enough” and therefore not a security. But if the SEC ever claims that Ethereum is an unregistered security, Fair suspects the courts will stand in its way.
“I can see the judges fully accepting, of course: Ethereum is largely based in the United States, because it runs on a bunch of computers, and a bunch of those computers are in the United States,” Fair said. “It’s happening in the United States. Never mind.”
